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We revised our GDP forecast to 1.0% in 2017

January 13, 2017

GDP likely declined again in 4Q16

In the short run, economic activity has been weaker than anticipated, especially in manufacturing, despite some promising sectorial indicators. Hence, GDP probably declined again in 4Q16 (our forecast is now -0.6% vs. stability previously). That implies deterioration in the statistical carryover into 2017 (to -0.8% from -0.4%). Nevertheless, demand fundamentals remain stable on the margin, enabling some economic expansion in 2017. We thus revised downward our forecast for GDP growth in 2017 to 1.0% from 1.5%.

GDP likely declined again in 4Q16

Recently-released data show economic activity levels below than expected previously. In November, industrial production increased slightly (0.2%), below our call (2.6%) and market estimates (1.3%). The result was consistent with the diffusion of activities, and not concentrated in any specific segment. Although preliminary indicators (auto production, heavy vehicle traffic on highways, paper cardboard dispatches, among others) suggest growth in industrial production in December, this would not offset the previous month’s disappointment.

In the service industry, real revenues were virtually flat in November (0.1%), after a substantial 2.3% slide in October, according to the Monthly Service Survey (PMS) by census bureau IBGE. Although the survey does not encompass the entire service industry (as calculated in the National Accounts), it showed further weakness in the sector, particularly in information and communication services.

Core retail sales beat expectations in November by climbing 2.0% (our estimate: 0.0%; market: 0.3%). However, such increase was probably driven by anticipation in year-end purchases (the Black Friday effect is still not properly captured by seasonal-adjustment algorithms). We expect a decline in December that will more than offset this positive surprise, as occurred in the two previous years.

All in all, this outcome suggests that GDP shrank 0.6% qoq/sa in 4Q16 (we previously expected a flat reading). All else constant, the statistical carryover will move to -0.8% (from -0.4%), meaning an impact of 0.4 p.p. on GDP growth in 2017.

Additionally, the situation of industrial inventories deteriorated somewhat on the margin. Inventories increased again, although demand has been stable and above capacity utilization. Thus, the cyclical adjustment in inventories should take longer than previously expected, conveying more sluggish growth in industrial production. However, as seen in the auto industry, we still believe that the process of inventory depletion will end in the coming months, contributing to the economic recovery.

Finally, although data has been weaker on the margin, fundamentals remain stable. In particular, commodity prices (which will probably be above 2016 levels on average) and the extension of monetary easing should enable moderate growth in 2017. With that in mind, we revised downward our forecast for GDP growth to 1.0% from 1.5% in 2017.